Over the course of the rest of this year, metals explorer African Eagle expects to deliver data that will help reduce the disconnection between its present £11.5 million market value and its claimed $8.8 billion of nickel in northern Tanzania.
Like many AIM metals explorers, African Eagle has flattered to deceive in its time on the market. However, while it has stumbled in its attempts to advance projects, it has built up a not-insignificant brood of nickel, gold and copper exploration projects. Due to the company’s small size, management last year felt forced to choose between their babies. Although the glistering gold price might seem to make those projects attractive, African Eagle has decided to plump for its nickel assets, because of their sheer size and low cost of evaluation.
Managing director Mark Parker, one of the founders of the company with former chairman John Park, also explained to Proactive Investors that ‘the exploration risk is very low’ at its Dutwa nickel project and that the exceptional metallurgy of the site will allow for good recovery rates and low-cost extraction.
Located 100km east of the well connected mining city of Mwanza and close to the main Mwanza-Nairobi trunk road, Dutwa is a nickel laterite deposit. Laterites – near-surface deposits where over many years the weather has leached away more soluble elements to leave mineable concentrations of nickel and other less soluble elements such as iron and magnesium – can be extracted with acid leaching. They have been less favoured than the vein-style nickel sulphides that traditionally were the deposit of choice, due to some expensive ‘miss-steps’ such as BHP’s Ravensthorpe laterite project, which was eventually sold for a song after US$2.1 billion of investment. But more than two thirds of nickel now comes from laterites and Parker is confident that, due to the low iron content of the Dutwa deposit, the project is definitely economic. ‘We can do it for maybe a tenth of the usual capital cost,’ he assures. ‘If Ambatovy [in Madagascar] cost $4 billion, our capital cost, even using the slightly more expensive options like tank leaching, will be $350-$500 million.’
In 2008 African Eagle announced an initial Inferred Mineral Resource estimate for Dutwa of 31 million tonnes at an average grade of 1.1% nickel and 0.034% cobalt, with a contained metal endowment of some 340,000 tonnes of nickel and 11,000 tonnes of cobalt. The company believes the resource will increase following current step-out drilling and the delineation of the nearby Ngasamo deposit, also underway. A pre-feasibility study (NYSE:PFS) for Dutwa is due at the end of calendar 2010 or in early 2011.
The metallurgy is key, though, explains Parker. ‘What we have is an average nickel content of about 1%-1.5%. But whereas some other companies’ more expensive projects have huge iron content of 30-40-50% and require high temperatures and high pressures to leach out the nickel, at our deposit nature has already done a lot of that work for us - so we have less than 10% iron and are low in magnesium and low in aluminium. So, yes, it’s not the highest grade but the metallurgy means that the extraction process is straightforward. We can process very straightforwardly with tank leaching or even cheaper heap leaching.’
Column leach tests at Dutwa gave 60% to 70% nickel extraction after just 16 days, rising to 90% after four months. This compares well against rival projects, where 540 days of leaching was required to extract 80% of the nickel at one trial heap elsewhere. African Eagle’s tank leach tests also showed very fast reaction rates. The fast leaching reaction, low acid consumption and good nickel extraction shown by these tests are good indicators for the viability and profitability of the project. The transport cost of sulphur, likely from Dar es Salaam, ‘will be a constraint,' admits Parker, though the scoping study showed the project is viable and future developments such as planned upgrades to railways and a potential oil refinery in neighbouring Uganda would ease this.
African Eagle has also identified a pair of other nickel deposits close to Dutwa that could be extracted with the same processing plant. At Ngasamo, 5km to the west, the company has an agreement with its Czech and local owners to acquire 35% once it has completed a drilling programme currently under way, and up to 50% or 75% on further exploration, evaluation and feasibility work. African Eagle recently completed the first phase of this drilling programme, which will establish a JORC inferred resource and provide material for metallurgical testing. March’s drilling update showed good nickel grades at Ngasamo over a greater thickness than Dutwa, with 36m at 1.63% nickel including 15m at 2.37%, 51m at 1.18% nickel, 57m at 0.92% nickel including 42m at 1.04%, and 78m at 0.86% nickel including 27m at 1.1%, as well as 9m at 0.27% cobalt including 3m at 0.48% and 12m at 0.17% cobalt.
More assay results announced this week continued along the same lines, showing 75m at 1.42% nickel, 84m at 1.07% nickel including 30m at 1.64%, 63m at 1.41% nickel including 45m at 1.71% and 57m at 1.25% nickel including 12m at 2.48%. Cobalt intercepts included 18m at 0.47% cobalt, 54m at 0.13%, 9m at 0.43% and 9m at 0.27% including 3m at 0.48%.
Furthermore, African Eagle holds the Zanzui nickel project, only 60km from Dutwa and ‘possibly twice as large’. Preliminary metallurgical tests showed that it shares the same low-acid leaching characteristics, with, adds Parker, ‘a little lower average nickel but good cobalt grades – so perhaps the value per tonne wouldn’t be so different from Dutwa. But we have to do more drilling there first.’
Seymour Pierce analyst Asa Bridle expects to add the new Ngasamo resource into his valuation metrics for the project shortly. Nevertheless, even at current levels he believes that the project is being underappreciated by the market: ‘with US$8.8 billion worth of nickel (340,000 tonnes at US$25,695 per tonne) already identified at Dutwa, there is clearly a disconnect between the project's value and AFE's market cap.’
The valuation should also include the rest of the portfolio that Parker has ‘backburnered’. This includes the Irugubi gold project in Tanzania, which has just been swapped with Aussie-listed Peak Resources for shares (around £2.6 million worth at the time), and a good half a dozen of Zambian projects that Parker says ‘are under negotiation’ and he ‘would consider any reasonable offer’ for.
Last August an African Eagle placing and an open offer together raised £3.4 million. To fund further developments past the pre-feasibility stage, more will be needed. To this end, Parker says he and industry guru chairman Euan Worthington are ‘talking to a number of potential strategic partners, some in the industry and others not’, adding that the company is proud of its record of being ‘s fair as possible to its existing shareholders’.
These investors have seen the shares fall from a year’s high of 11.32p to the present 4p, despite the strengthening of the nickel price. The forthcoming months should see ample news flow in the run-up to the PFS, promises Parker, two sets of new drill results and further metallurgical results from Dutwa, a resource estimate at Ngasamo, an upgrade of Dutwa’s resource estimate from inferred to indicated in a month or so and he hopes to a recalculation of the economics of the project to bring break-even costs down from their present $6.50per lb to nearer $5.50. Furthermore, Parker advises that the composition of the board is likely to change over coming years from explorers to miners as it moves closer towards development.
Disclosure: The author holds no positions in the company